<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ________________
COMMISSION FILE NUMBER 1-9016
----------------------------
AMERICAN INDUSTRIAL PROPERTIES REIT
(Exact name of registrant as specified in its charter)
TEXAS 75-6335572
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
6210 NORTH BELTLINE ROAD, SUITE 170
IRVING, TEXAS 75063-2656
(Address of principal executive offices) (Zip Code)
(972) 756-6000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 13,352,127 Shares of
Beneficial Interest were outstanding as of November 9, 1998.
<PAGE> 2
AMERICAN INDUSTRIAL PROPERTIES REIT
FORM 10-Q
FOR THE THREE MONTHS AND THE NINE MONTHS ENDED SEPTEMBER 30, 1998
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for the three months and nine months
ended September 30, 1998 and 1997 (unaudited).......................................... 3
Consolidated Balance Sheets as of September 30, 1998 (unaudited) and
December 31, 1997...................................................................... 4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1998 and 1997 (unaudited)................................................ 5
Notes to Consolidated Financial Statements (unaudited)................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................ 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................. 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................................................... 18
Item 2. Changes in the Rights of the Company's Security Holders................................ 18
Item 6. Exhibits and Reports on Form 8-K....................................................... 19
SIGNATURES........................................................................................... 20
</TABLE>
2
<PAGE> 3
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
REVENUES
<S> <C> <C> <C> <C>
Rents $ 10,448 $ 2,007 $ 26,211 $ 5,902
Customer reimbursements 1,971 559 5,611 1,885
Interest income 102 405 500 436
------------ ------------ ------------ ------------
12,521 2,971 32,322 8,223
------------ ------------ ------------ ------------
EXPENSES
Property operating expenses:
Property taxes 1,092 345 3,092 1,032
Property management fees 372 96 970 290
Utilities 897 111 1,754 294
General operating 724 194 1,997 616
Repairs and maintenance 604 100 1,197 279
Other property operating expenses 400 71 1,118 247
Depreciation and amortization 2,268 715 5,821 2,105
Interest on unsecured notes payable 99 427 307 1,312
Interest on mortgages payable 3,871 742 9,805 2,703
Administrative expenses:
Trust administration and overhead 847 509 2,596 1,320
Litigation and proxy costs -- 2 -- 439
------------ ------------ ------------ ------------
11,174 3,312 28,657 10,637
------------ ------------ ------------ ------------
Income (loss) from operations 1,347 (341) 3,665 (2,414)
Minority interests in
consolidated subsidiaries (58) -- (177) --
Gain on sale of real estate -- -- -- 312
------------ ------------ ------------ ------------
Income (loss) before extraordinary items 1,289 (341) 3,488 (2,102)
Extraordinary gain (loss) on extinguishment of debt (23) -- (23) 2,643
============ ============ ============ ============
NET INCOME (LOSS) $ 1,266 $ (341) $ 3,465 $ 541
============ ============ ============ ============
PER SHARE DATA (BASIC AND DILUTED)
Income (loss) before extraordinary items $ 0.10 $ (0.08) $ 0.30 $ (0.75)
Extraordinary gain on extinguishment of debt 0.00 0.00 0.00 0.94
------------ ------------ ------------ ------------
Net Income (loss) $ 0.10 $ (0.08) $ 0.30 $ 0.19
============ ============ ============ ============
Distributions declared $ 0.20 $ -- $ 0.58 $ --
============ ============ ============ ============
Weighted average shares outstanding-basic 12,470,471 4,354,378 11,389,513 2,793,417
============ ============ ============ ============
Weighted average shares outstanding-diluted 12,497,471 4,354,378 11,407,513 2,793,417
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
1998 1997
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Real estate:
Held for investment $ 403,848 $ 265,312
Accumulated depreciation (31,052) (25,521)
---------- ----------
Net real estate 372,796 239,791
Cash and cash equivalents:
Unrestricted 7,639 11,683
Restricted 4,391 2,121
---------- ----------
Total cash and cash equivalents 12,030 13,804
Other assets, net 8,304 4,800
---------- ----------
Total Assets $ 393,130 $ 258,395
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage notes payable $ 207,106 $ 114,226
Unsecured notes payable -- 7,200
Accrued interest 1,146 269
Accounts payable, accrued expenses and other liabilities 5,509 7,231
Distribution payable 2,945 --
Customer security deposits 1,644 1,254
---------- ----------
Total Liabilities 218,350 130,180
---------- ----------
Minority interests 7,239 6,444
Shareholders' Equity:
Shares of beneficial interest, $0.10 par value; authorized 500,000,000 Shares
issued and outstanding 13,479,843 Shares at September 30, 1998 and 9,817,171
Shares at December 31, 1997 1,348 982
Additional paid-in capital 275,430 224,989
Less Shares in treasury, at cost; 165,886 at September 30, 1998 and 42,103 at
December 31, 1997 (2,226) (626)
Accumulated distributions (65,358) (58,456)
Accumulated loss from operations and extraordinary gains (losses) (44,964) (48,429)
Accumulated net realized gain on sales of real estate 3,311 3,311
---------- ----------
Total Shareholders' Equity 167,541 121,771
---------- ----------
Total Liabilities and Shareholders' Equity $ 393,130 $ 258,395
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
AMERICAN INDUSTRIAL PROPERTIES REIT
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,465 $ 541
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Extraordinary (gain)/loss 23 (2,643)
Gains on sale of real estate -- (312)
Minority interests in consolidated subsidiaries 177 --
Depreciation 5,506 1,846
Amortization of deferred financing costs 328 146
Other amortization 315 259
Changes in operating assets and liabilities:
Increase in other assets and restricted cash (5,176) (1,363)
Increase (decrease) in accounts payable, other
liabilities and customer security deposits (2,124) 268
Increase in accrued interest 877 741
---------- ----------
Net Cash Provided By (Used In) Operating Activities 3,391 (517)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of real estate and related working capital (100,025) (6,404)
Net proceeds from sale of real estate -- 2,029
Capitalized expenditures (3,598) (646)
---------- ----------
Net Provided By Cash Used In Investing Activities (103,623) (5,021)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments on notes payable (48,645) (4,008)
Proceeds from mortgage financing 134,325 --
Proceeds from sale of Shares, net 16,595 31,316
Purchase of treasury shares (1,600) --
Distributions to minority interests (257) --
Distributions to shareholders (4,230) --
---------- ----------
Net Cash Provided By Financing Activities 96,188 27,308
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents (4,044) 21,770
Cash and Cash Equivalents at Beginning of Year 11,683 4,010
---------- ----------
Cash and Cash Equivalents at End of Period $ 7,639 $ 25,780
========== ==========
Cash Paid for Interest $ 8,907 $ 3,128
========== ==========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of real estate ($ 35,553) --
Issuance of operating partnership units 875 --
Other assets and unrestricted cash (599) --
Accounts payable and tenant security deposits 1,065 --
Issuance of common shares 34,212 --
Declaration of distributions (2,672)
Distribution Payable 2,672 --
---------- ----------
Net Non-Cash Investing and Financing Activities $ -- $ --
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(unaudited)
NOTE 1 -- BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements are presented in
accordance with the requirements of Form 10-Q and consequently do not include
all of the disclosures required by generally accepted accounting principles or
those contained in American Industrial Properties REIT's (the "Trust") Annual
Report on Form 10-K. Accordingly, these financial statements should be read in
conjunction with the audited financial statements of the Trust for the year
ended December 31, 1997, included in the Trust's Annual Report on Form 10-K.
The financial information included herein has been prepared in accordance
with the Trust's customary accounting practices and has not been audited. In the
opinion of management, the information presented reflects all adjustments
necessary for a fair presentation of interim results. All such adjustments are
of a normal and recurring nature.
The Trust is a self-administered Texas real estate investment trust which,
as of September 30, 1998, owned and operated 54 commercial real estate
properties consisting of 42 industrial properties, 10 office buildings and 2
retail properties. The Trust was formed September 26, 1985 and commenced
operations on November 27, 1985. Pursuant to the Trust's 1993 Annual Meeting of
Shareholders, amendments to the Trust's Declaration of Trust and Bylaws were
approved which, among other things, changed the name of the Trust to American
Industrial Properties REIT and converted the Trust from a finite life entity to
a perpetual life entity.
Principles of Consolidation. The consolidated financial statements of the
Trust include the accounts of the Trust and its wholly-owned subsidiaries and
majority-owned subsidiaries. Significant intercompany balances and transactions
have been eliminated in consolidation.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results may differ significantly from
such estimates and assumptions.
Rents and Tenant Reimbursements. Rental income, including contractual rent
increases or delayed rent starts, is recognized on a straight-line basis over
the lease term. The Trust has recorded deferred rent receivable (representing
the excess of rental revenue recognized on a straight line basis over actual
rents received under the applicable lease provisions) of $1,145,000 and $525,000
at September 30, 1998 and December 31, 1997, respectively.
Manhattan Towers, an office property, has rental revenues in excess of 10%
of the total revenues of the Trust for the nine months ended September 30, 1998.
Rental revenues and customer reimbursements from Manhattan Towers totaled
$3,411,000 for the nine months ended September 30, 1998 and $1,189,000 in the
third quarter of 1998, representing 10.6% and 9.5%, respectively, of the Trust's
total revenues for the periods.
Income Tax Matters. The Trust operates as a real estate investment trust
("REIT") for federal income tax purposes. Under the REIT provisions, the Trust
is required to distribute 95% of REIT taxable income and is allowed a deduction
for distributions paid during the year.
Earnings and profits, which will determine the taxability of distributions
to shareholders, will differ from that reported for financial reporting purposes
due primarily to differences in the basis of the assets, the estimated useful
lives used to compute depreciation and the straight line rent adjustment.
6
<PAGE> 7
NOTE 2 -- REAL ESTATE:
At September 30, 1998 and December 31, 1997, real estate was comprised of
the following:
<TABLE>
<CAPTION>
SEPTEMBER, 30, DECEMBER 31,
1998 1997
-------------- ------------
<S> <C> <C>
Held for investment:
Land ................................... $ 81,700,000 $ 56,315,000
Buildings and improvements ......... 322,148,000 208,997,000
------------ ------------
Total .................................. $403,848,000 $265,312,000
============ ============
</TABLE>
In the third quarter of 1998, the Trust acquired eight real estate
properties for approximately $51.8 million. To fund these acquisitions, the
Trust paid approximately $5.6 million in cash, obtained $12.0 million of
financing under an acquisition line of credit and a demand note with Developers
Diversified Realty Corporation ("DDR") and issued $34.2 million in Shares to DDR
(see Note 6).
In accordance with accounting pronouncement EITF 97-11, the Trust has
changed its capitalization policy with respect to internal acquisition costs. On
March 19, 1998, the Trust ceased the capitalization of costs related to its
internal acquisition department. The Trust capitalized $160,000 through March
19, 1998 and $401,000 for the year ended December 31, 1997.
NOTE 3 -- MORTGAGE NOTES PAYABLE:
At September 30, 1998, 43 of the Trust's 54 properties were subject to
liens securing mortgage notes payable totaling $207,106,000. Of this amount,
approximately $107,223,000 was represented by mortgage notes with fixed interest
rates ranging from 7.25% to 9.13% and a weighted average interest rate of 7.97%.
Mortgage notes payable with variable interest rates consisted of $57,233,000 and
$42,650,000 under the Trust's secured acquisition credit line and secured bridge
loan, respectively, with Prudential Securities Credit Corporation ("PSCC"). The
acquisition credit line and bridge loan bear interest at the 30 day LIBOR rate
plus 1.75% and mature in April 1999 and December 1998, respectively. The
interest rate at September 30, 1998 was 7.41%. The Trust is currently
negotiating to increase the acquisition credit line and extend the maturity
date. The Trust also anticipates refinancing the bridge loan with proceeds from
fixed rate permanent financing. There can be no assurance that the negotiations
or refinancing efforts will be successful.
Certain of the mortgage notes payable contain cross default and cross
collateralization provisions whereby a default under one note can trigger a
default under other notes. Certain of the mortgage notes payable, including the
line of credit and bridge loan, also contain various borrowing restrictions and
operating performance covenants. The Trust is in compliance with all such
restrictions and covenants as of September 30, 1998. The unused commitment under
the acquisition credit line at September 30, 1998 is $14,500,000, subject to
certain restrictions and provisions of the line of credit.
NOTE 4 -- UNSECURED NOTES PAYABLE:
As a result of the December 31, 1997 merger with four real estate limited
partnerships, the Trust assumed an unsecured indebtedness of $7,200,000 payable
to a significant shareholder of the Trust. In April 1998, the Trust refinanced
this amount with proceeds from a financing under its acquisition credit line.
7
<PAGE> 8
NOTE 5 -- MINORITY INTERESTS:
Operating Partnerships. AIP-SWAG Operating L.P. and AIP Operating, L.P.
have 179,085 and 58,333 limited partnership units outstanding, respectively, as
of September 30, 1998 (excluding limited partnership units held by the Trust).
Pursuant to the limited partnership agreement for each partnership, the limited
partners received rights (the "Redemption Rights") that enable them to cause the
partnership to redeem each limited partnership unit for cash equal to the value,
as determined in accordance with the partnership agreement, of a Share (or, at
the Trust's election, the Trust may purchase each limited partnership unit
offered for redemption for one Share). The Redemption Rights generally may be
exercised at any time after one year following the issuance of the limited
partnership units. The number of Shares issuable upon exercise of the Redemption
Rights will be adjusted for share splits, mergers, consolidations or similar pro
rata transactions, which would have the effect of diluting the ownership
interests of the limited partners or the shareholders of the Trust. The limited
partners' interest in each partnership is reflected as minority interest in the
accompanying consolidated financial statements.
Other Partnerships. In connection with the merger of four real estate
limited partnerships, effective December 31, 1997, the Trust acquired a 55.84%
interest in Chelmsford Associates LLC, formerly Chelmsford Associates Joint
Venture, a joint venture owning one office property. The remaining 44.16%
interest is owned by a significant shareholder of the Trust. The financial
position and results of operations of the joint venture is included in the
consolidated financial statements of the Trust. The other venturer's interest in
the partnership is reflected as minority interest in the accompanying
consolidated financial statements.
NOTE 6 -- SHAREHOLDERS' EQUITY:
Capital Stock. On March 5, 1998, the Trust announced a Share repurchase
program, wherein the Trust was authorized to purchase up to 1,000,000 Shares
over the following six months. Purchases would be made in open market
transactions, as price and market conditions allow. As of September 30, 1998,
the Trust has purchased 123,783 Shares in the open market, for an aggregate cost
of $1,598,067. These Shares are held in treasury.
On March 24, 1998 the Trust instituted a dividend reinvestment and share
purchase plan. As of September 30, 1998, 46,087 Shares were issued under this
plan for proceeds of $555,969.
Private Placement. On January 30, 1998, the Trust completed a $10 million
private equity placement at $13.625 per Share. In February 1998, two investment
groups exercised their preemptive rights and acquired $5 million and $3.75
million, respectively, of Shares at $13.625 per Share. The Shares are of the
same class as the Trust's existing Shares and are entitled to the same voting
and distribution rights as all Shares, subject to certain restrictions on the
resale of the Shares. Their preemptive rights have since been terminated.
On August 3, 1998, the Trust entered into a definitive agreement providing
for a strategic investment by DDR in the Trust. Under the terms of the Share
Purchase Agreement, the transaction has three stages. The first stage of equity
investment, effective as of July 30, 1998, resulted in DDR acquiring 2,207,618
Shares at a price of $15.50 per share in exchange for consideration valued at
approximately $34.2 million. The Shares are of the same class as the Trust's
existing Shares and are entitled to the same voting and distribution rights as
all Shares, subject to certain restrictions on the resale of the Shares. The
second and third stages of equity investment have not occurred as of September
30, 1998. (See Note 11).
Share Options, Dividend Equivalent Rights and Restricted Shares. Effective
April 1, 1998, the Board of Trust Managers approved awards of 460,000 share
options to 12 members of management. The options vest 20% annually and have an
exercise price of $13.625 per Share. Pursuant to the Share Purchase Agreement
with DDR, the Board granted the newly elected Chairman options to purchase
100,000 Common Shares at a price of $12.63 per Share, which vest on the closing
date of the second stage.
The Board of Trust Managers also approved grants of dividend equivalent
rights to the 12 members of management whereby the grantees are entitled to
receive a payment equal to the dividends declared and paid by the
8
<PAGE> 9
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(unaudited)
Trust on an aggregate of 460,000 Shares. The dividends payable to the grantees
shall be paid annually on or before December 31 of each calendar year, for a
period of 10 years from the date of grant, unless earlier terminated. In
addition, the Board approved the award of 27,000 restricted shares to four
members of management. The restricted shares vest 25% annually beginning on the
first anniversary date of the date of grant.
NOTE 7 -- TRANSACTIONS WITH RELATED PARTIES:
Certain real estate investments are managed by Quorum Real Estate Services
Corporation ("Quorum") an affiliate of a major shareholder of the Trust. For
Quorum services, including, but not limited to, construction, tenant finish,
leasing and management, Quorum is paid competitive rates. The Trust paid
management fees of $141,000 and leasing commissions of $8,000 to Quorum for the
quarter ended September 30, 1998. For the nine months ended September 30, 1998,
management fees and leasing commissions paid by the Trust to Quorum were
$390,000 and $27,000, respectively. No such fees were paid by the Trust in 1997.
In addition to DDR's equity investment (see Note 6), DDR also provided real
estate management services and interim financing for real estate acquisitions.
DDR is paid a competitive rate for the management services, including, but not
limited to, tenant finish, leasing and reporting. As of September 30, 1998 DDR
is owed approximately $16,000 for management services. The Share Purchase
Agreement with DDR provided the Trust with the option to borrow amounts on an
unsecured basis from DDR solely for the purpose of funding property
acquisitions. Such loans are payable upon demand and bear interest at 10.25%. In
the third quarter, the Trust borrowed and repaid $20.4 million for the
acquisition of one property. Interest paid by the Trust to DDR related to this
borrowing totaled $99,000. As of September 30, 1998, the Trust did not have any
outstanding loans with DDR.
NOTE 8 -- LITIGATION:
The Trust is currently named as a defendant in a lawsuit related to the
Trust's merger with four real estate limited partnerships. The lawsuit purports
to be both a class action and a derivative lawsuit against the defendants. The
plaintiffs have asserted various claims, including breach of fiduciary duty and
various securities law violations, against the parties to the merger and certain
individuals and are seeking monetary damages. On April 13, 1998, the Trust was
named as a defendant in an additional purported class action lawsuit related to
the Trust's merger with the four real estate limited partnerships. The
plaintiffs have asserted various claims, including breach of fiduciary and
contractual duties and various securities law violations, against the parties to
the merger and are seeking monetary damages. The Trust intends to vigorously
defend against these claims. In management's opinion, the liabilities, if any,
that may ultimately result from such legal actions are not expected to have a
material adverse effect on the consolidated financial position or results of
operations of the Trust.
Although the Trust is not currently involved in any significant litigation
other than that described above, the Trust may, on occasion and in the normal
course of business, be involved in legal actions relating to the ownership and
operations of its properties. In management's opinion, the liabilities, if any,
that may ultimately result from such legal actions are not expected to have a
material adverse effect on the consolidated financial position or results of
operations of the Trust.
NOTE 9 -- DISTRIBUTIONS:
On January 29, 1998, the Trust reinstated quarterly distributions to
shareholders. Distributions of $0.18 and $0.20 per share were paid on April 14,
1998 and July 14, 1998, to shareholders of record on April 3, 1998 and July 3,
1998, respectively. On July 30, 1998, the Trust declared a distribution of $0.20
per share payable on October 14, 1998, to shareholders of record on October 2,
1998.
9
<PAGE> 10
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(unaudited)
NOTE 10 -- PER SHARE DATA:
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Basic and diluted earnings per share:
Numerator:
Income/(loss) before extraordinary items .......... $ 1,289,000 $ (341,000) $ 3,488,000 $ (2,102,000)
Extraordinary items ............................... (23,000) -- (23,000) 2,643,000
------------ ------------ ------------ ------------
Net income/(loss) ................................. $ 1,266,000 $ (341,000) $ 3,465,000 $ 541,000
Denominator:
Weighted average
shares ............................................ 12,470,471 4,354,378 11,389,513 2,793,417
Plus restricted shares ............................ 27,000 -- 18,000 --
------------ ------------ ------------ ------------
Adjusted weighted average shares .................. 12,497,471 4,354,378 11,407,513 2,793,417
Basic and diluted earnings per share:
Income/(loss) before extraordinary items .......... $ 0.10 $ (0.08) $ 0.30 $ (0.75)
Extraordinary items ............................... -- -- -- 0.94
Net income/(loss) ................................. $ 0.10 $ (0.08) $ 0.30 $ 0.19
</TABLE>
Options to purchase 460,000 Shares at $13.625 per share, 100,000 Shares at
$12.63 per share, 135,000 Shares at $15.00 per Share and 4,000 Shares at $14.688
per Share were outstanding but were not included in a computation of diluted
earnings per share because the options' exercise price was greater than the
average market price of the Shares and, therefore, the effect would be
antidilutive. Also, diluted earnings per Share are the same as basic earnings
per Share for 1997, as the Trust had a loss from operations and, therefore, the
effect would be antidilutive.
At September 30, 1998, 40,000 warrants were outstanding. The warrants have
an exercise price of $17.50 per Share and expire in October 2000. Because the
warrants exercise price was greater than the average market price of the Shares
the effect would be antidilutive.
On April 1, 1998, 27,000 restricted Shares were issued to members of
management pursuant to the Trust's Employee and Trust Manager Share Incentive
Plan. The restricted Shares vest 25% annually beginning on the first anniversary
date of the date of grant.
NOTE 11 -- SUBSEQUENT EVENTS:
On October 6, 1998, the Trust acquired a 71,635 square foot light
industrial property in Houston, Texas for $4,110,000. An unsecured loan from DDR
was used to fund the acquisition.
On October 14 and October 16, 1998, the Trust purchased a portfolio
consisting of five light industrial properties totaling approximately 561,000
square feet located in Virginia. The properties were acquired from five entities
for total consideration of $40,170,000. The purchase price was funded with
$22,421,000 in assumed debt and the remainder in unsecured loans from DDR.
On October 28, 1998, the Trust mailed to Shareholders a Proxy Statement for
a November 20, 1998 Special Meeting of Shareholders. Shareholders will vote on
the issuance of up to 11,064,193 Shares and 10,266,795 Series A Convertible
Preferred Shares of Beneficial Interest of the Trust pursuant to (i) the Share
Purchase Agreement, effective July 30, 1998, between the Trust and DDR, as
amended by Amendment No. One thereto, dated as of September 14, 1998, and (ii)
the Agreement and Plan of Merger, dated as of July 30, 1998, among the Trust,
DDR and DDR Office Flex Corporation.
10
<PAGE> 11
AMERICAN INDUSTRIAL PROPERTIES REIT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(unaudited)
Under the terms of the Share Purchase Agreement, the transaction has three
stages. The first stage, effective as of July 30, 1998, resulted in DDR
acquiring 2,207,618 Shares at a price of $15.50 per Share in exchange for
consideration valued at approximately $34.2 million. In the second stage, DDR
will purchase up to an additional 5,226,583 Shares for $15.50 per Share (for
total consideration of approximately $81 million) to fund property acquisitions
approved by the Trust's board. In the third stage, the Trust has the option to
require DDR to purchase additional shares with a total purchase price not to
exceed $200 million to fund property acquisitions. The price of the shares and
the amount to be invested in the third stage is contingent upon several
factors, including the trading prices of DDR and Trust shares, the market
capitalization of DDR and whether common or preferred shares are issued to DDR.
The Trust has entered into a letter of intent to purchase a portfolio of
service center and light industrial properties located in Northern California
for $141 million. Consummation of the transaction is subject to customary due
diligence, negotiation of mutually acceptable definitive agreements and other
contingencies and legal matters. Accordingly, there is no assurance the
properties will ultimately be acquired by the Trust.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Trust and accompanying Notes included
elsewhere in this report as well as the audited financial statements appearing
in the Trust's 1997 Annual Report to Shareholders. The statements contained in
this report that are not historical facts are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Actual results
may differ materially from those included in the forward-looking statements.
These forward-looking statements involve risks and uncertainties including, but
not limited to, changes in general economic conditions in the markets that could
impact demand for the Trust's properties and changes in financial markets and
interest rates impacting the Trust's ability to meet its financing needs and
obligations.
RESULTS OF OPERATIONS
Comparison of Three Months Ended September 30, 1998 to September 30, 1997
The weighted average amount of net rentable square feet owned by the Trust
increased from 1,456,000 square feet during the three months ended September 30,
1997 to 5,710,000 square feet for the same period in 1998, an increase of 292%.
Property revenues increased 384% to $12,419,000 in 1998 from $2,566,000 in 1997,
and net operating income increased 405% to $8,330,000 in 1998 from $1,649,000 in
1997 as a result of these acquisitions. The percentage increase in property
revenues and net operating income was larger due to the significant amount of
office properties acquired since the third quarter of 1997. Overall leased
occupancy of the Trust's portfolio was 92.0% at September 30, 1998 compared to
92.7% at September 30, 1997. This decrease in occupancy reflects the 1998
acquisition of certain properties with less than stabilized occupancy and the
non-renewal of certain tenants.
On a same property basis, property revenues increased from $2,345,000 in
1997 to $2,544,000 in 1998, an increase of 8.5%, comprised of an 8.4% increase
in revenue related to industrial properties, a 12.4% increase in revenue
related to an office property, and an 8.0% increase in revenue at the Trust's
retail property in Denver, Colorado.
On a same property basis, net operating income (which is defined as
property revenues less property operating expenses and which does not include
depreciation and amortization, interest expense, or Trust administration and
overhead expenses) increased from $1,473,000 in 1997 to $1,659,000 in 1998, an
increase of 12.6%. This overall increase is comprised of a 9.0% increase related
to industrial properties, a 37.8% increase related to an office property, and an
18.5% increase related to the Trust's retail property in Denver Colorado. Same
property operating expenses increased by 1.5%, due primarily to higher property
taxes.
For the three months ended September 30, 1998, the Trust reported income
before extraordinary items of $1,289,000, compared to a loss of $341,000 in
1997. This increase relates to the increase in net operating income of
$6,681,000 explained above, offset by an increase in total interest expense of
$2,801,000 (due to the increased debt levels associated with property
acquisitions), an increase in Trust administration and overhead expenses of
$336,000 and an increase in depreciation and amortization of $1,553,000 (due to
the acquisition of approximately $305 million of properties between September
1997 and September 1998).
During the three months ended September 30, 1998, the Trust recognized
extraordinary loss on extinguishment of debt of $23,000 resulting from
prepayment penalties on the early retirement of debt.
Comparison of Nine Months Ended September 30, 1998 to September 30, 1997
The weighted average amount of net rentable square feet owned by the Trust
during the nine months ended September 30, 1998 increased to 4,938,000 square
feet from 1,437,000 square feet for the same period in 1997, an increase of
244%. Property revenues increased 309% to $31,822,000 for the nine months ended
September 30, 1998 from $7,787,000 for the same period in 1997, and net
operating income increased 331% to $21,694,000 for the nine
12
<PAGE> 13
months ended September 30, 1998 from $5,029,000 for the same period in 1997 as a
result of acquisitions. The percentage increase in property revenues and net
operating income was larger than the percentage increase in the weighted average
square feet owned primarily as a result of the significant amount of office
properties acquired since the third quarter of 1997.
On a same property basis, property revenues increased from $7,120,000 for
the nine months ended September 30, 1997 to $7,409,000 for the same period in
1998, an increase of 4.1%, comprised of a 2.6% increase in revenue related to 11
industrial properties, a 13.6% increase in revenue at an office property, and a
5.0% increase in revenue at the Trust's retail property in Denver, Colorado.
On a same property basis, net operating income (which is defined as
property revenues less property operating expenses and which does not include
depreciation and amortization, interest expense, or Trust administration and
overhead expenses) increased from $4,525,000 for the nine months ended September
30, 1997 to $4,785,000 for the same period in 1998, an increase of 5.7%. This
overall increase is comprised of a 2.9% increase related to 11 industrial
properties, a 21.5% increase related to an office property, and a 10.5% increase
related to the Trust's retail property in Denver, Colorado. Same property
operating expenses increased by 1.1%.
For the nine months ended September 30, 1998, the Trust reported income
before extraordinary items of $3,488,000, compared to a loss of $2,102,000 in
1997. This increase relates to the increase in net operating income of
$16,665,000 explained above, offset by an increase in total interest expense of
$6,097,000 (due to the increased debt levels associated with property
acquisitions), an increase in Trust administration and overhead expenses of
$837,000 and an increase in depreciation and amortization of $3,716,000 (due to
the acquisition of approximately $305 million of properties between September
1997 and September 1998).
During the nine months ended September 30, 1998, the Trust recognized
extraordinary loss on extinguishment of debt of $23,000 resulting from
prepayment penalties on the early retirement of debt.
Cash flow provided by operating activities in the nine months ended
September 30, 1998 was $3,391,000. Included in this amount is $5,176,000 related
to an increase in other assets and restricted cash and $2,124,000 related to a
decrease in accounts payable, other liabilities and customer security deposits.
These amounts include certain items which the Trust believes to be nonrecurring,
including the reclassification of certain accrued amounts and the payment of
costs accrued at December 31, 1997 related to the Trust's merger with four real
estate limited partnerships.
Cash flow used in investing activities in the nine months ended September
30, 1998 was $103,623,000, representing amounts expended on the acquisition of
real estate and related working capital totaling $100,025,000, and capitalized
expenditures of $3,598,000.
Cash flow provided by financing activities in the nine months ended
September 30, 1998 was $96,188,000. This amount reflects net proceeds from
mortgage financings and repayments of mortgage principal of $85,680,000, net
proceeds from the private placement of Shares of $16,595,000, repurchase of
Shares totaling $1,600,000 and distributions to shareholders of $4,230,000.
Funds from Operations
The Board of Governors of the National Association of Real Estate
Investment Trusts, Inc. ("NAREIT") defines Funds from Operations ("FFO") as net
income (loss) computed in accordance with generally accepted accounting
principles, excluding gains or losses from debt restructuring and sales of
property, plus real estate related depreciation and amortization, and after
adjustments for unconsolidated partnerships and joint ventures. The Trust
calculates FFO in a manner consistent with the NAREIT definition. In addition,
NAREIT recommends that extraordinary items or significant non-recurring items
that distort comparability should not be considered in arriving at FFO.
Accordingly, the Trust does not include the non-recurring interest accrual
related to the conversion of the modified notes held by an affiliate into
Shares.
13
<PAGE> 14
The Trust believes FFO is an appropriate measure of performance relative to
other REITs. FFO provides investors with an understanding of the ability of the
Trust to incur and service debt and make capital expenditures. There can be no
assurance that FFO presented by the Trust is comparable to similarly titled
measures of other REITs. While other REITs may not always use a similar
definition, this information does add comparability to those which have adopted
the NAREIT definition. FFO should not be considered as an alternative to net
income or other measurements under generally accepted accounting principles as
an indicator of the Trust's operating performance or to cash flows from
operating, investing, or financing activities as a measure of liquidity. FFO
does not reflect working capital changes, cash expenditures for capital
improvements, or principal payments on indebtedness.
The following table shows the Trust's cash flows from its operating,
investing and financing activities prepared in accordance with generally
accepted accounting principles:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Net cash provided by (used in) operating
activities $ 3,725 $ (2) $ 3,391 $ (517)
Net cash used in investing activities (20,153) (6,620) (103,623) (5,021)
Net cash provided by financing activities 13,960 31,149 96,188 27,308
</TABLE>
The following table shows the Trust's calculation of FFO:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
NET INCOME/(LOSS) ..................................... $ 1,266 $ (341) $ 3,465 $ 541
Exclude effects of:
Real estate depreciation and
amortization, net of
minority interest share ................... 2,205 713 5,635 2,102
Minority interest in operating partnerships .... 47 -- 137 --
Gain on sale of real estate .................... -- -- -- (312)
Extraordinary loss/(gain) on
extinguishment of debt .................... 23 -- 23 (2,643)
Non-recurring interest accrual related to
conversion of debt to equity ............. -- 188 -- 835
------------ ------------ ------------ ------------
Funds from Operations ................................. $ 3,541 $ 560 $ 9,260 $ 523
============ ============ ============ ============
Weighted average Shares and operating
partnership units outstanding ......................... 12,707,889 4,354,378 11,620,882 2,793,417
</TABLE>
YEAR 2000 ISSUES
Some older computer software was written using two digits rather than four
to define the applicable year. As a result, those computer programs have
time-sensitive software that recognize a date using "00" as the year 1900 rather
than the year 2000. This could cause a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, create customer statements, or engage in similar normal
business activities.
The Trust's plan to resolve Year 2000 issues involves the following four
phases: assessment, remediation, testing and implementation. To date, the Trust
has assessed all existing internally used hardware and systems (both
14
<PAGE> 15
information technology and non-information technology) that could be
significantly affected by the Year 2000 issue. Based on these assessments,
management believes that existing hardware and systems used by the Trust are
Year 2000 compliant. Additionally, the Trust is currently upgrading the existing
network and property operations/accounting systems. These upgrades are being
instituted to meet current and future needs of the Trust, not as a result of our
initial Year 2000 assessment. The Trust is taking precautions, including testing
these systems prior to implementation, to insure that all upgrades and
modifications are Year 2000 compliant. Should the testing indicate potential
Year 2000 issues the Trust will begin remediation immediately. The upgrade of
the existing network and systems is estimated to be 60% complete. The Trust
expects to complete the testing and implement the new systems by December 31,
1998.
The Trust has queried and/or received disclosure statements from
significant external service providers. To date, the Trust is not aware of any
Year 2000 problems with these third parties that would materially impact the
Trust's results of operations, liquidity or capital resources. However, the
Trust has no means of ensuring that external service providers will be Year 2000
compliant. The inability of these service providers to complete their Year 2000
resolution processes in a timely manner could impact the Trust. The effect of
non-compliance by service providers is not determinable. The Trust is also
reviewing all properties which may use date sensitive software in elevators and
heating and cooling equipment to confirm no problem exists.
Although a potential area of significant exposure to the Trust is the
contracting to third parties of property management, accounting, and leasing
services, the Trust utilizes thirty-day cancelable contracts and, should a
material risk arise with respect to the Year 2000 problem, anticipates
terminating the contract and hiring a new vendor. In addition, the Trust
currently plans to transition to self-management, accounting and leasing of its
own properties, thereby significantly eliminating the use of third parties in
these areas.
As noted above, the Trust has completed the initial assessment and believes
the existing internal systems and upgrades are Year 2000 compliant. The Trust
does not expect historical and future costs related to the Year 2000 issue to
have a material effect on the consolidated financial position or results of
operations of the Trust. Although not anticipated, if the Trust is unable to
complete the remaining phases with respect to the upgraded network and systems,
the Trust may be unable to transition to self-management, accounting and
leasing. The Trust has the ability to continue daily operations using existing
systems. Although management does not currently believe that the effect of the
Year 2000 problem will have a material impact on the Trust, there is no
guarantee that unforeseen circumstances will not arise which could cause a
material adverse effect upon the Trust's operations.
LIQUIDITY AND CAPITAL RESOURCES
The principal sources of funds for the Trust's liquidity requirements are
funds generated from operation of the Trust's real estate assets, equity
offerings, debt financings and/or refinancings, and unrestricted cash reserves.
As of September 30, 1998, the Trust had $7.6 million in unrestricted cash.
In order to fund future property acquisitions, the Trust anticipates
entering into equity transactions as market conditions allow. In January 1998,
the Trust completed a $10 million private placement of Shares at $13.625 per
Share. In February 1998, two shareholders exercised their preemptive rights
(which are now terminated) and acquired an aggregate of $8.7 million of Shares
at $13.625 per Share. On August 3, 1998, the Trust entered into a definitive
agreement providing for a strategic investment by DDR in the Trust. Under the
terms of the Share Purchase Agreement, the transaction has three stages. The
first stage, effective as of July 30, 1998, resulted in DDR acquiring 2,207,618
Shares at a price of $15.50 per Share in exchange for consideration valued at
approximately $34.2 million. In the second stage, DDR will purchase up to an
additional 5,226,583 Shares for $15.50 per Share (for total consideration of
approximately $81 million) to fund property acquisitions approved by the Trust's
board. In the third stage, the Trust has the option to require DDR to purchase
additional shares with a total purchase price not to exceed $200 million to fund
property acquisitions. The price of the shares and the amount to be invested in
the third stage is contingent upon several factors, including the trading prices
of DDR and Trust shares, the market capitalization of DDR and whether common or
preferred shares are issued to DDR.
On February 18, 1998, the Trust filed a Form S-3 shelf registration with
the Securities and Exchange Commission which would provide for the issuance of
up to $500 million in Shares, Preferred Shares of Beneficial
15
<PAGE> 16
Interest, unsecured senior debt securities and/or warrants to purchase such
securities in amounts, at prices and on terms to be determined by market
conditions at the time of future offerings. The Trust anticipates utilization of
this shelf registration in the future to fund acquisitions and growth of the
Trust.
On March 5, 1998, the Board of Trust Managers authorized a Share repurchase
program allowing the Trust to purchase up to 1,000,000 Shares from time to time
in open market transactions, as price and market conditions allow, over the
following six months. As of September 30, 1998, the Trust has purchased 123,783
Shares in the open market, at an aggregate cost of approximately $1,598,000.
The Trust will also initiate debt transactions from time to time as a means
of sourcing capital with which to acquire properties. The Trust currently has a
secured acquisition line of credit with Prudential Securities Credit Corporation
("PSCC") which has a maturity in April 1999. The acquisition line was amended on
April 30, 1998 to increase the maximum borrowing amount from $35 million to $75
million and to lower the variable interest rate to the 30 day LIBOR rate plus
1.75%. The Trust utilizes this line, which limits borrowing to 70% of the value
of the properties acquired, to fund acquisitions and is currently negotiating to
increase the acquisition credit line and extend the maturity date. The Trust
anticipates the repayment of this borrowing with proceeds from future equity
fundings or permanent debt financings.
At September 30, 1998, the Trust had $207.1 million in debt outstanding, of
which approximately $107.2 million was represented by fixed rate debt with a
weighted average interest rate of 7.97%, and of which approximately $99.9
million was represented by variable rate debt under its secured acquisition line
and a secured bridge loan with an interest rate at September 30, 1998 of 7.41%.
At September 30, 1998, the Trust's total market capitalization (based upon a
September 30, 1998 share price of $10.00 per Share) was approximately $340
million. Based upon this amount, the Trust's debt to total market capitalization
ratio at September 30, 1998 was 60.9%. The Trust intends to operate in the
foreseeable future at or above this leverage ratio, believing that, given
current market conditions, its acquisition capability should be maximized with
the equity capital currently available.
On a long term basis, the Trust expects to meet liquidity requirements
generated by property operating expenses, debt service, and future distributions
with funds generated by the operations of its real estate properties. Should
such funds not cover these needs, the possibility of future distributions may be
reduced or eliminated.
On January 29, 1998, the Trust reinstated quarterly distributions to
shareholders. Distributions of $0.18 and $0.20 per share were paid on April 14,
1998 and July 14, 1998, to shareholders of record on April 3, 1998 and July 3,
1998, respectively. Future distributions will be at the discretion of the Board
of Trust Managers. The Trust has approximately $33.9 million in net operating
loss carryforwards, of which approximately $1.2 million per year could be
utilized to reduce the payout required by the Internal Revenue Code of 95% of
taxable income. However, the Trust intends to follow a distribution policy which
currently targets a payout between 65% and 75% of FFO, which will exceed the
minimum payout required. Should the Trust experience increased earnings and FFO
in the future, it is likely that the Trust will reduce its distribution payout
over time to the minimum required by the Internal Revenue Code as a means of
preserving internally generated capital.
The nature of the Trust's operating properties, which generally provide for
leases with a term of between three and five years, results in an approximate
turnover rate of 15% to 25% of the Trust's customers and related revenue
annually. Such turnover requires capital expenditures related to tenant
improvements and leasing commissions, capital repairs and replacements, initial
capital expenditures and expansions and renovations related to properties
acquired in order to maintain or improve the Trust's occupancy levels. These
costs have historically been funded out of the Trust's operating cash flow and
cash reserves.
The Trust characterizes its capital expenditures as recurring and
nonrecurring. Recurring capital expenditures include 1) tenant improvements and
leasing commissions, which include improvements and prepaid leasing commissions
related to new and renewing tenants; 2) capital repairs and replacements, which
extend the useful life of an asset, such as roofs or parking lots; and 3)
corporate fixed assets, which are primarily relate to corporate furniture,
fixtures and equipment. Nonrecurring capital expenditures include 1) initial
capital expenditures, which are costs identified at the time of property
acquisition as costs required to bring the property to intended leasable
condition at the acquisition date; and 2) expansions and renovations, which are
expenditures resulting in additions to leasable square footage or major
renovations which are revenue enhancing. During the nine months ended
16
<PAGE> 17
September 30, 1998 and 1997, the Trust incurred capital expenditures of
$4,028,000 and $646,000, respectively. These amounts consisted of recurring and
nonrecurring capital expenditures of $1,511,000 and $2,517,000, respectively, in
1998 and $646,000 in recurring capital expenditures in 1997.
The Trust has made no commitments for additional capital expenditures
beyond those related to normal leasing and releasing activities, related escrows
and initial capital expenditures. Initial capital expenditures, which are costs
necessary to bring acquired properties to intended leasable condition at the
time of acquisition, are estimated at $7,747,000 at September 30, 1998.
RECENT DEVELOPMENTS
On October 6, 1998, the Trust acquired 10, a 71,635 square foot light
industrial property in Houston, Texas for $4,110,000. An unsecured loan from DDR
was used to fund the acquisition.
On October 14 and October 16, 1998, the Trust purchased a portfolio
consisting of five light industrial properties totaling approximately 561,000
square feet located in Virginia. The properties were acquired from five entities
for total consideration of $40,170,000. The purchase price was funded with
$22,421,000 in assumed debt and the remainder in unsecured loans from DDR.
On October 28, 1998 the Trust mailed to Shareholders a Proxy Statement for
a November 20, 1998 Special Meeting of Shareholders. Shareholders will vote on
the issuance of up to 11,064,193 Common Shares of Beneficial Interest and
10,266,795 Series A Convertible Preferred Shares of Beneficial Interest of the
Trust pursuant to (i) the Share Purchase Agreement, effective July 30, 1998,
between the Trust and DDR, as amended by Amendment No. One thereto, dated as of
September 14, 1998, and (ii) the Agreement and Plan of Merger, dated as of July
30, 1998, among the Trust, DDR and DDR Office Flex Corporation.
Under the terms of the Share Purchase Agreement, the transaction has three
stages. The first stage, effective as of July 30, 1998, resulted in DDR
acquiring 2,207,618 Shares at a price of $15.50 per Share in exchange for
consideration valued at approximately $34.2 million. In the second stage, DDR
will purchase up to an additional 5,226,583 Shares for $15.50 per Share (for
total consideration of approximately $81 million) to fund property acquisitions
approved by the Trust's board. In the third stage, the Trust has the option to
require DDR to purchase additional shares with a total purchase price not to
exceed $200 million to fund property acquisitions. The price of the shares and
the amount to be invested in the third stage is contingent upon several
factors, including the trading prices of DDR and Trust shares, the market
capitalization of DDR and whether common or preferred shares are issued to DDR.
The Trust has entered into a letter of intent to purchase a portfolio of
service center and light industrial properties located in Northern California
for $141 million. Consummation of the transaction is subject to customary due
diligence, negotiation of mutually acceptable definitive agreements and other
contingencies and legal matters. Accordingly, there is no assurance the
properties will ultimately be acquired by the Trust.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
17
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Trust is currently named as a defendant in a lawsuit related to the
Trust's merger with four real estate limited partnerships. The lawsuit purports
to be both a class action and a derivative lawsuit against the defendants. The
plaintiffs have asserted various claims, including breach of fiduciary duty and
various securities law violations, against the parties to the merger and certain
individuals and are seeking monetary damages. The Trust intends to vigorously
defend against the plaintiffs' claims. In management's opinion, the liabilities,
if any, that may ultimately result from such legal action are not expected to
have a material adverse effect on the consolidated financial position or results
of operations of the Trust.
On April 13, 1998 the Trust was named as a defendant in an additional
purported class action lawsuit related to the Trust's merger with the four real
estate limited partnerships. The plaintiffs have asserted various claims,
including breach of fiduciary and contractual duties and various securities law
violations, against the parties to the merger and are seeking monetary damages.
The Trust intends to vigorously defend against the plaintiffs' claims. In
management's opinion, the liabilities, if any, that may ultimately result from
such legal action are not expected to have a material adverse effect on the
consolidated financial position or results of operations of the Trust.
ITEM 2. CHANGES IN THE RIGHTS OF THE COMPANY'S SECURITY HOLDERS
In January 1998, the Trust sold a total of 733,945 Shares at $13.625 per
Share (total proceeds of $10,000,000) to Praedium II Industrial Associates LLC.
The placement agent for the transaction was Prudential Securities, Inc. and the
total commission charged was $400,000. This transaction was determined to be
exempt from registration under Section 4(2) of the Securities Act of 1933, as
amended, because the transaction did not involve a public offering and the sale
was made to an accredited investor.
In February 1998, the Trust sold 367,000 Shares at $13.625 per Share (total
proceeds of $5,000,000) to certain clients and affiliates of Morgan Stanley
Asset Management, Inc. (collectively, "MSAM") and sold 275,300 Shares at $13.625
per Share (total proceeds of $3,750,000) to certain clients of ABKB/LaSalle
Securities Limited Partnership and LaSalle Advisors Limited Partnership. The
placement agent for these transactions was Prudential Securities, Inc. and the
total commission charged was $350,000. These transactions were determined to be
exempt from registration under Section 4(2) of the Securities Act of 1933, as
amended, because the transactions did not involve a public offering and the
sales were made to an accredited investor.
On August 3, 1998, the Trust entered into a definitive agreement providing
for a strategic investment by DDR in the Trust. Under the terms of the Share
Purchase Agreement, the transaction has three stages. The first stage of equity
investment, dated to be effective as of July 30, 1998, resulted in DDR acquiring
2,207,618 Shares at a price of $15.50 per Share in exchange for consideration
valued at approximately $34.2 million. The placement agent for these
transactions was Prudential Securities, Inc. and the total commission charged
was $1,369,000. The Shares are of the same class as the Trust's existing Shares
and are entitled to the same voting and distribution rights as all Shares,
subject to certain restrictions on the resale of the Shares. The second and
third stages of equity investment have not occurred as of September 30, 1998
(see Note 11).
18
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
27.1 * Financial Data Schedule
</TABLE>
* Filed herewith
(b) Reports on Form 8-K
(1) Amendment No. 1 filed with the Commission on
July 13, 1998 to Current Report of Form 8-K
filed with the Commission on May 14, 1998;
(2) Current Report on Form 8-K filed with the
Commission on August 5, 1998;
(3) Current Report on Form 8-K filed with the
Commission on September 17, 1998.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN INDUSTRIAL PROPERTIES REIT
(Registrant)
Date: November 13, 1998. /s/ MARC A. SIMPSON
--------------------------------------------------
Marc A. Simpson
Senior Vice President and Chief Financial Officer
(principal financial officer)
Date: November 13, 1998. /s/ GARY A. WILLIAMS
--------------------------------------------------
Gary A. Williams
Vice President and Chief Accounting Officer
(principal accounting officer)
20
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
27.1 * Financial Data Schedule
</TABLE>
* Filed herewith
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 12,030
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 403,848
<DEPRECIATION> (31,052)
<TOTAL-ASSETS> 393,130
<CURRENT-LIABILITIES> 218,350
<BONDS> 0
0
0
<COMMON> 1,348
<OTHER-SE> 166,193
<TOTAL-LIABILITY-AND-EQUITY> 393,130
<SALES> 0
<TOTAL-REVENUES> 32,322
<CGS> 0
<TOTAL-COSTS> 18,545
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,112
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,488
<DISCONTINUED> 0
<EXTRAORDINARY> (23)
<CHANGES> 0
<NET-INCOME> 3,465
<EPS-PRIMARY> .30
<EPS-DILUTED> .30
</TABLE>
